Noreen Weiss quoted in POLITICO Pro article about crowdfunding rules
‘Crowdfunding’ rules languish with SEC, Congress
By PATRICK TEMPLE-WEST
The overnight proliferation of “crowdfunding” websites, hoping to match investors with entrepreneurs launching startup companies, has crashed into a logjam in Washington.
Despite renewed demands from Congress that the Securities and Exchange Commission finalize its landmark crowdfunding rules, agency action remains far off, according to lobbyists and industry participants. These sources added that the SEC has little incentive to move quickly, anticipating that Congress’s new Republican majority is likely to consider rewriting the crowdfunding regulations next year.
The 2012 JOBS Act allowed companies to sell private equity and debt offerings to retail investors on crowdfunding websites like Kickstarter.com. For now, these businesses can only raise money with loans, or in exchange for goods and services such as a T-shirt or beer.
But if, for example, the virtual reality company Oculus had been able to sell equity stakes to its Kickstarter investors, those people would have shared in the company riches when Facebook bought it for $2 billion in March.
While the idea of equity-based crowdfunding is simple, it requires an unprecedented set of financial rules from the SEC, and agency officials have noted that putting them together is a time consuming process. The SEC must make its rules easy enough for companies and investors to understand, but tough enough to prevent fraud.
For now, the SEC has no timetable for finalizing the crowdfunding rules it proposed in October 2013, said sources who have met recently with agency staff.
“We’re going to be waiting a long time,” said Ron Miller, CEO of StartEngine Crowdfunding Inc., who met with staffers on Nov. 21. “This is not happening in the near term.”
An SEC spokeswoman declined to comment on the timing of the rules.
With Republicans eager to pass a second version of the JOBS Act, SEC officials are likely waiting to see if Congress gives the agency an easier package of crowdfunding regulations to write, said a lobbyist who also met recently with SEC staffers about the crowdfunding rules.
Another roadblock for the crowdfunding rules comes from the 2010 Dodd-Frank law. The SEC still has to finalize the Dodd-Frank, “pay ratio” rule for corporate executives’ compensation, a rulemaking that has deeply divided the agency’s Democratic and Republican commissioners. The agency’s remaining Dodd-Frank rules for swaps are also competing for attention.
Despite these challenges, Democrats and Republicans are still barking at the SEC to finalize its proposed JOBS Act rules.
“Given the heavy workload the Commission still has before it to finalize the reforms of the Dodd-Frank Act, we are concerned that completing regulations for Title III of the JOBS Act may remain continuously delayed,” said a draft of a letter being circulated by Democratic Sens. Merkley of Oregon and Michael Bennet of Colorado. They both sponsored a crowdfunding bill that was wrapped into the JOBS Act.
“Title III” of the JOBS Act contained the crowdfunding rules the SEC needs to write.
“Sen. Merkley has been urging Chair [Mary Jo] White and the SEC to get these rules across the finish line,” a Merkley spokeswoman said. “The small business community is waiting in the wings for this new source of capital to open up.”
Sen. Jerry Moran (R-Kan.) made a similar appeal in October.
House Republicans are arguing the JOBS Act imposed deadlines on the SEC to finish those rules that Dodd-Frank did not.
“Because the SEC has chosen to expend limited resources on the pay ratio rule, it is now significantly more difficult for the SEC to advance its capital formation mission, as well as complete mandatory rulemakings to implement the JOBS Act,” three House Republicans said in a Nov. 24 letter to White.
Republican SEC Commissioner Dan Gallagher, a crowdfunding advocate, said in a September speech that if the SEC’s proposed rules are unworkable “then the Commission should be loudly telling Congress that we need a legislative fix, and that we need it now.”
The wait for the final rules is particularly painful for crowdfunding portals, like Miller’s Los Angeles-based StartEngine.com. The law created this new class of exchanges that will not need to register as broker-dealer businesses to offer the crowdfunding securities.
Miller said his company is burning through $30,000 a month as the SEC’s crowdfunding rules remain delayed.
“There are dozens, perhaps hundreds, of similarly situated companies that are suffering the same consequences,” he said.
Other governments are racing ahead with crowdfunding rules. In March, U.K. securities regulators adopted equity crowdfunding rules, and in November, Texas regulators approved crowdfunding for state residents.
“This is the biggest change in financial markets in many decades,” said Noreen Weiss, a lawyer who advises clients about private securities. “There is no question in my mind that the Republicans are going to push it once they start in 2015.”